Alternatives 1 and 2 in the Following Payoff Table Represent

question 21

Multiple Choice

Alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt. The level of demand affects the success of both strategies. The states of nature (S_I) represent the levels of demand for the company products. S₁, S₂, and S₃ characterize high, medium, and low demand, with probabilities of .3, .6, and .1, respectively. The payoff values are in thousands of dollars. The management believes that weather conditions significantly affect the level of demand. 48 monthly sales reports are randomly selected. These monthly sales reports show 15 months with high demand, 28 months with medium demand, and 5 months with low demand. 12 of the 15 months with high demand had favorable weather conditions. 14 of the 28 months with medium demand had favorable weather conditions. Only 1 of the 5 months with low demand had favorable weather conditions. The estimated probabilities of poor weather conditions given different levels of demand are presented below.
P(Poor |High) = .2, P(Poor |Medium) = .5, P(Poor |Low) = .8
What is the probability of high demand given that the weather conditions are poor?

• A) .06
• B) .44
• C) .1429
• D) .12
• E) .1818

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Definitions:

Required Return

The minimum expected return by investors for providing capital to a particular investment, taking into account the risk level.

Market Value

The cost at which an asset or service can presently be transacted in the market.

Taxable

Pertains to financial income or transactions that are subject to taxation by governmental authorities.

Dividends

Dividends are payments made by a corporation to its shareholder members, distributing a portion of the company’s earnings as a reward for their investment.